A good Finance Question?

Question

would you rather have a savings account that pays 5 percent interest compounded semi anually or one that pays 5 percent interest compounded daily? Can you please explain

Answer 1

Compounded daily.

Interest accrues by multiplying the principal by the percentage rate for the period, and adding that interest calculation to the principal.

Compounding occurs when you accrue interest on the new balance, including the interest that was added to the principal previously. Its interest on the interest.

The more frequently the compounding, the higher the total interest, for the same interest rate.

Here's an example. If you invest $100 and collect 10 percent a year, then simple interest with no compounding you would pay $10 interest at the end of the year and you would have $110.

But if the interest is compounded semiannuially, then at six months you would receive $5 (10 pct for half a year) and have $105. Then at the end of the year you would receive another $5.25 interest (10 percent of $105 for half a year), for a total of $110.25

the extra .25 over simple interest is the effect of compounding.

Answer 2

There's not much difference in the total payout between the two CDs for discrete vs. continuous compounding.

On a $10,000 investment, continuous compounding would earn you an extra 4 cents a year over daily compounding. It's easy to find financial institutions offering daily compounding. Don't waste your time chasing down the elusive continuously compounded CD.

I wouldn't worry so much about the effects of compounding, but instead put the effort into other types of investments, eg. real estate, mutual funds, stocks, etfs etc.
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Answer 3

If you invest in an account that pays 5% daily you will become the first trillionaire before you die.

Answer 4

I am sooooo sorry but: I dont know